The East African ride to Middle Income

You have embarked on a long train ride in Africa. The train is in bad shape, the ride is bumpy and breakdowns frequent. You wonder when you will arrive at destination or if you ever will. But after a tortuous first half of the trip, the train is starting to gain speed. There are still a number of unnecessary stops but the destination is now in sight and passengers are becoming upbeat. Just as the train is about to enter the station you are overtaken by three trains, which had been accelerating even faster.

This train could be Kenya in East Africa’s race to Middle Income. The country remains the richest in East Africa and with almost US$800 income per capita is the closest to meeting the international Middle Income threshold of US$1000. But its EAC partners Rwanda, Uganda and Tanzania are catching up fast.

Kenya could be the first EAC country to reach Middle Income status by 2020, but only if it achieves its potential of about 6 percent uninterrupted economic growth. However, if Kenya’s economy only grows at 3.7 percent (the average of the last decade), the train will likely be overtaken by Rwanda, Tanzania and Uganda in the next ten years. Middle income status would still be possible, but only by 2037.

Today, Rwanda, Tanzania and Uganda have per-capita incomes of around US$ 550, substantially below Kenya’s. If past trends continue, Kenya would still be ahead in 2020 but the gap would gradually narrow (see table) and by 2022, Rwanda would take first place soon followed by Tanzania and Uganda.

Table: East Africa’s ride to Middle IncomeSource: World Bank estimates and projections

The fact that most of East Africa can reach Middle Income in the next ten years is remarkable and more important than the ultimate ranking of the frontrunners.

Today, the EAC is one of the fastest growing regions in the world. If Rwanda, Tanzania and Uganda maintain their ongoing growth momentum and if Kenya accelerates, all four countries will reach Middle Income status within the next ten years. For the first time since independence, sustainable development appears possible for East Africa, even for countries that started off from very difficult positions.

Making it to the Middle Income station is not the end of the journey. Most economic challenges will remain, including fighting poverty. At an annual income of US$ 1000 the average East African would only “earn” US$ 83 per month, or less than US$3 per day. However, being a middle income country brings you into a new league of countries, and the right to be compared with the so−called “emerging economies”.

Global players have also taken note. No week goes by without a major international company announcing plans to expand its East African operations or to relocate there, often in Nairobi.

Regional integration is one way for the Kenyan train to reach the station sooner. Larger markets allow companies to reap economies of scale, produce a larger set of goods in greater quantities and thus increase variety and reduce cost for consumers. Already today, Kenyan firms are investing in Tanzania, Uganda and Rwanda, and these countries benefit from cheaper, higher quality products. Much more could be done. Agriculture and transport are two areas where reforms are badly needed to improve intra-regional trade. East Africa could easily feed itself simply by allowing markets to work. While Kenya has a structural food deficit, Tanzania and Uganda typically have surpluses of basic food commodities. If these three countries traded with each other more effectively, Kenyans would pay less for food, especially maize, while Tanzanian and Ugandan farmers would earn more. Priority should be given to regional roads and corridors, as today it is costly, sometimes impossible, to move goods across the region.

The port of Mombasa is the gateway for most of East Africa’s products. Unfortunately, it is one of the worst performing ports in the world, and its closest competitor–the port of Dar es Salaam–is achieving even less. Today, Mombasa transacts in one year what Singapore handles in a week. A better functioning port would increase the flow of goods, reduce costs and attract industries, many of which are looking for a new home, as Asia is becoming more expensive. It would also favor the flow of goods transiting to and from landlocked countries (Rwanda and Uganda) and operate as a catalyst for the region.

Infrastructure which connects people and markets will be critical for East Africa to become one the world’s new emerging regions. One huge challenge remains the railways. The day when Kenyans will board a train to Kampala with perfect confidence that they will reach their destination comfortably, reliably and fast, is the day you will know that the region is firmly on the Middle Income track.

Comments

You bring up a good point especially about maintaining the "6 percent uninterrupted economic growth".
We hope that the 2012 elections will be peaceful and uneventful so that there is no interruption in the economy. We also hope that the current downward trend that we are experiencing at the moment will take an upward turn.
The Kenyan Diaspora have a key role. We urge the Kenyans in the Diaspora to stop being spectators and actively participate in events occurring in our home country. There are lots of opportunities for investments, the leading one being the Vision 2030 Flagship Project Konza City. Another way to participate is the obvious one.. to vote in the 2012 elections.
Great article and we hope to stay at the top event long after 2020!

Thanks a lot for your feedback. 2012 in indeed a defining year for Kenya (http://blogs.worldbank.org/africacan/kenyas-defining-year) and the more you get involved the likelier it will end well. Over the last 30 years, growth was on average a percent lower in election years than in non-election years (http://blogs.worldbank.org/africacan/is-democracy-bad-for-kenya-s-economic-development)
But if Kenya would grow 5 percent or higher this year and next this trend could be reversed.

Very interesting analysis. The way Meles Zenawi of Ethiopia talks about his country's double-digit growth after his party took over the country; one would think Ethiopia would be on your list of countries destined to join if it hasn't already joined the middle income countries.

I love the article, very optimistic about the future of the East African community however the issues of governance remain critical as well making sure this growth does not bring more inequality but the benefits are enjoyed by all.

Wow,
We are at the verge of becoming a middle income east Africa! a dream come true for my beloved country Rwanda. let me get back to work. We Rwandans believe that if others are walking towards development, we have got to put on our running shoes and runner faster and strategically. it is very paramount that we run as East African Team, Four to Five Heads are very much better than one. Go East Africa

The article is remarkable and an indication of how industrious Kenyans are. Its good to know that middle income level is within our reach. But what will it serve without good overnance, we may always fall behind if we do not watch our ays. This leads me to my point, governance! Without good governance the middle income status is only a dream. I urge all kenyans to br tolerrant, tollerant towards their neighbours opinions, beliefs, ideologies, cultures and any other thing worth respecting in a society. Ideal leaders are ment to unite and cemet this unity in national symbols like the constitution. We are heading towards a time where a leader does not represent hidtribes men alone, but Kenyans.
Respect for private roperty should also e respected and advocatd for by integral leaders.
I say this with the hope that Kenyans will vote wisely, based on performace and integrit of leaders. Let us not vote for a candidate because we want to bing another candidate down, but by his ideology and what he purposes to do in office.
I forever am proud to be KENYAN

Great article, but for purposes of measuring Middle Income status, I think Median GDP would be a better measure than Average GDP per Capita. Agreed that Rwandese focus on Income inequality means they are better positioned to actually have the median citizen earn $1,000 by within the next 15 years.

"Plus equity, plus growth" Kenyans want to hear more than just middle income status. A growth that does not reduce the economic disparities will not be beneficial to us. We need to design better ways to share the growth, the wealth and overall prosperity will be appreciated by all. The perfomance comparison between Mombasa and Singapore ports shows how we still lag behind in improving systems. I have been to Singapore many times and one can tell how they compete. If train wagons leave the station, operate all day and return back nearly as clean as they started in the morning, you know you are in for some competiion- wake up Kenya!

The amazing feat in all of this must be that it's even possible for countries like Kenya, Rwanda, Tanzania, and Uganda to reach middle income status for Average GDP in the next 20 years. It is also an extremely positive article written about a region (EAC) that is normally thrown out or producing negative news. I find it very interesting and promising that major international companies are announcing plans to expand their East African operations or to relocate there. This is a huge step for this region, regardless of statistics.
In today's global economy, and the tremendous unequal balance of wealth, foreign investment is surely a good sign for countries trying to claim the "emerging" tag and break from the chains of extreme poverty. Infrastructure is the key to as stated, and railways must be safe and secure throughout East Africa. Foreign Aid to these countries should be focused more on the infrastructure in the next ten years to secure that they eventually break into middle income status. Maybe capitalistic thinking is not the best way out for this region, but in today's state, I believe it is the only way. Trade and logistics need work, but it is possible, and foreign aid distributors should realize that this is what this region needs.
Nevertheless, great article that finally shows some positivity towards a long suffering region.

It whould be easier for countries with less population with the right policy to achive this goal. For example if you take ethiopia it has a population of 91,000,000 m according july 2011 estimate. While other neighbouring countries for example Ruwanda, kenya, tanzania conbines has the same population size. So my point is Ethiopian needs to do more from what has been achived so far. Anyway good news for Africa!!!

Dear Mr. Devarajan,
I really liked the article... the title, and specially the introduction story of the " train ride" which I was almost certain, and expected to read about Ethiopia too. The train ride resembles our Ethiopian train, which started the journey a while ago to take us to our (remembering our glorious past-to present) and we started seeing "the light at the end of the tunnel" . Ethiopia has one of the most ambitious infrastructure projects in the continent, which is the basis for building a strong and diverse economy and to join the middle income country club, which is the destiny of our train. Again, I would live to hear your take on the train ride of Ethiopia too.
Cordially
Sultan
Addis Ababa,

Dear Sultan,
Many thanks for your response. The article is written by me, Wolfgang Fengler (Twitter @wolfgangfengler), as part of Shanta Devarajan's "Africa Can" blog.
Ethiopia seems to have many similarities (and few differences, e.g. the Telecoms sector) to the EAC countries. My colleague Chorching Goh who is based in Addis Abeba is covering Ethiopia and she would have the insights you are looking for.
Wolfgang

Pessimism as a vision for Africa has reigned far too long. The facts are, as you point out, a new middle class is rising in Africa. I would like to point out that right behind the present middle class and ready to broaden its base is Africa's youth. They have been raised in an age of expanding technology on the continent. They have a entrepreneurial spirit, optimism and courage that make them the change agents for the next several decades.
Right now in Nairobi a group of young people are meeting for a Startup Weedend Nairobi. These young aspiring entrepreneurs will put together companies that will produce new jobs and streams of income.

Does the attainment of the 'middle income status' have a direct impact on the status of citizen's? If not, then there is no excitement about East African Countries being middle income countries today of tomorrow or a decade later. We have seen a few individuals becoming richer and richer when the low earners get poorer.
True, Uganda and Rwanda have significantly reduced the poverty levels over the last decade (if the figures available are to be believed), but many countries, including the world's biggest economy, China, and the second most populous economy, India, still have very large poor populations.
Let us concentrate on uplifting the poorest communities and individuals, rather than being excited over 'middle income' statuses.

I seriously have to question the validity of the projections and statistics presented. As a trade economist and manufacturing product developer, I take issue when substantive structural concerns that are not highlighted. Its great to think about median income, but the reality is how can a resource rich people with land generally remain poor? When banks around the world lend on asset value how is it that the many small individual farmers, SACCOS and cooperatives cannot raise capital for farming and manufacturing projects? I am more interested in controlling the means of production and quality in Africa for Africans and this will create not just median income status individuals but millionaires. Let’s be clear, I only hope Africans will be just too fellow Africans when this day arrives, unlike many of the people that have colonized them over the years. Given that Rwanda and Uganda are starting from lower and different bases compared to Kenya, I seriously think they will give Kenya a run for its household living standards, proverbial growth and income inequality. Ethiopia looks poised to move forward agriculturally (which is honorable) provided it does not allow foreign Indian firms to simply strip the value out of its economy. Although Ethiopia is NOT mentioned, which I find puzzling, the country should and truly focus on food security with organizations and groups that have its best interest at heart. As for Tanzania, there seem to be more efficiencies in their economy, as I have personally examined. If this is capitalized upon further, they will succeed in meeting the demands of the country to build a stronger economic base but also to assist there neighbors in infrastructure channels and imports/exports. Using average or median GDP is simply not a true measure when working on Africa. All the time I've learned and heard this standard to measure Western government progress - it’s just not complete. Well in Africa, the playing field is different and it gives me pride to say so. I will not go into details here but it high time to look at measuring and developing plans of action that truly touch upon the hidden factors in building capacity and growth. If Kenya is to get anywhere, given all the talk of the educated populace, then they must move toward an innovative manufacturing base that's wholly African Centric. They must also consider innovative and new ways to eliminate bureaucracy and increase business ethics. Frankly, if the partisanship between ethnic groups cannot be me mitigated by skills and meritocracy, Kenyans will continue to be exploited by their own people and from other business speculators that possess a non-altruistic mission and purpose at the expense of workers.

I really like your article. I am a Kenyan who works online and makes around $2,000-3,000 p.m and am really happy about it. I have opened many pf my peers and we are about 100 people working on the same stuff, especially online jobs from the US and UK. Please also try to reflect the current trends, say, like the last 5 years coz 10 years is such a long time and I remember even Moi was the president when the economy of Kenya was growing at minus (-). Thanks and as East Africa, we gonna show the rest of Africans hows its done.

Well it is quiet a chery news for our brothers in East parts of Africa. I pray and wish they summon enough courage, will and dedication and improve on what has been achieved and see how the issues regaring Piracy on the Mobassa axis is completely brought to a lasting solution. Otherwise, what Singapore handles in one week is what we are handling in one year! what a gap and how can hope to get there? Afica buckled up!!!

I read that article and it is exciting. Well being a Kenyan i can only hope we do not lose the momentum and this will requiring putting into place good leaders in this year election. Investing in railways is very critical and upgrading the port of Mombasa. If you ask me, why build Lamu port at 2 trillion Kenyan shillings and the port at Mombasa is dying out. At least they need to up grade it first before they go into something new otherwise the new port will also die out.

Dear Dr. Devarajan:
Thank you for writing this blog. I just learned about it through Wold Bank presence on Facebook and related tweet on Wold Bank's twitter page. Would you consider a twitter account for your wonderful and highly informative/engaging blog?
Will look to join the discussion here. Inspired to now go do a little research on this topic.
Thank you again for your service and commitment.
Best regards,
Abarie

Dear Abarie,
Many thanks for your kind response to my blog post. My name is Wolfgang Fengler and I am the World Bank's Lead Economist based in Nairobi. Shanta Devarajan in the World bank's Chief Economist for all of Sub-Saharan Africa and the host of this blog. You can follow us on Twitter:
Shanta: Shanta_WB
Wolfgang: Wolfgangfengler
Best regards
Wolfgang

Amazing article I can say,as a matter of fact if Kenyan govt shift its focuss on stirring economic growth in rural areas ,we will achieve.
A challenge also to N.G.Os to go directly to the people on the ground instead of using government structures which put funds to risk of embezzlement.
Yes we can.

Mombasa is an origin and destination port off the main east-west liner trade routes and should NOT be compared to a transshipment port like Singapore or Hong-Kong or Rotterdam where container volume is counted differently and moreover, are not impacted by the inefficiency of others. But, yes, Mombasa port capacity and efficeiny inprovements are long overdue - way overdue.

Thanks for your insight on the different nature of ports. However, Mombasa has actually been handling a good portion of transshipment business which it lost to Dubai (and even to the new port in Djibouti). With further EAC integration, Mombasa has even greater potential Mombasa should benefit enormously from handling gods for its neighbors.

Its amazing what Rwanda has achieved, its not a miracle in itself but commitment by leadership to lead by example and walk the talk. i do hope other East African Countries especially my fellow Ugandans follow Rwanda's foot steps. the time for talking was yesterday and acting is now.

Great article Wolfgang! It's good that these groups of countries are getting on a path to growth. Among the discussion of the 'EAC' countries, I noticed that Burundi is not mentioned. Even if it's not performing well, it's important to highlight the bad performance as well in order to hold the decision-makers there to account. The situation is not totally hopeless there as all the other countries you're mentioning have also been through their turbulent times. I could go even further for the case of Kenya and Tanzania (perhaps Uganda) that it's surprising that they haven't reached middle-income status yet considering they have not gone through civil wars, etc...The governance and corruption issues need to be taken seriously for all those countries because I feel like that is the main reason many of them have not reached their full-scale economic development. The statistic about the Mombasa port versus Singapore made me hold my face in my hands. I started thinking about the amount of business potential lost over those ineficiencies...In short, there is still A LOT of work to do and it's too soon to celebrate because those countries could slip back easily as they have done in the past.

Excellent read!
The GROWTH potential of Eastern Africa in general,and KENYA in particular is progressivly possible,but ONLY with GOOD GOVERNANCE!
ONLY when THE WEALTH of the NATION seives down to the populace,will the GROWTH POTENTIAL show true results in uplifting the 'living standards' of citizens!
HOW can we ALL achieve this?
The next KENYA ELECTIONS are round the corner,and THE FUTURE of KENYA and its people are trully in the hands of the voting public!
GOODLUCK KENYA in particular and EASTERN AFRICA in general!

East AFrican countries are growing and its a pleasure to know how Africans are striving so hard to achieve some positive results. AND INDIA? POLITICIANS ARE FIGHTING TO RUIN INDIA'S FINANCIAL TREASURY. FORTUNATELY THEY ARE FINALLY CAUGHT RED HANDED AND THEY ARE TRYING ALL STONES UNTURNED TO EVADE THE LEGAL RESULT ENDING IN JAIL FOR MOST OF THE CONGRESS CROOKS.